Decentralised Finance

What is Decentralised Finance?

Decentralised Finance (DeFi) is an umbrella term for blockchain-based financial applications.

Why is this neccessary?

Beginning the end of January 2021, Gamestop was hit with thousands of investors wanting in on their seemingly 'dead' stock. Without delving in to a completely separate topic, simply put: investors over at the subreddit r/WallStreetBets organized a mass buy-in of  the stock GME (GameStop), driving up its price to a high of over 20 times its price compared with the year's start.

This made the big investment firms over at Wall Street mad. 😠

This battle was fiery enough, until a US-based investments app, RobinHood, decided that trading of the stock GME would be disabled temporarily. 

WHAT?

How can they do that? Why would they do that? is that even legal?

The 3 weeks following the halt, over 90 federal lawsuits were filed against Robinhood claiming that their actions were unfair and unlawful.

This screams the need for DeFi. In a decentralised exchange (DEX), there is no controlling entity so trading cannot be tampered with, situations like this are virtually impossible. In fact, seraches for decentralised finance has been spiking consistently since the beginning of the year:

But that isn't all DEX's are useful for. Currently, the most popular DEX's swap your £ → crypto, or crypto → crypto. Without a company in the middle, this means unlimited buy amounts, and the lowest fees around, making for a much more pleasant trading experience. On top of this, your asset or money isn't being trusted with an intermediate, it is being held in the system, waiting for to be withdrawn or swapped.

N.B. Decentralised exchanges are fairly new. With that, there is risk involved. Although the smart contracts held within these exchanges have been thoroughly vetted, they have yet to stand the test of time. Trade at your own risk.

Other uses for DeFi 

Lending platforms - Aiming to replace intermediaries such as banks that manage middle-man lending. No ID required, No Collateral.

Prediction markets - For betting on the future outcomes of events, elections etc.

Stablecoins - Stablecoins are blockchain-based replacements for fiat currencies such as the pound, dollar or euro. They are pegged to the real-time price of their counterpart and are used to provide a stable place to park your money when using an exchange, as most cryptocurrencies have volatile swings in price. As these coins are not regulated currencies, they are not subject to strict rules, so it is much easier for DEX's to provide a stablecoin → crypto pair rather than fiat → crypto.

Yield farming 🚜 (WARNING: RISKY) - Yield farming any activity where you put your cryptoassets to work for you - similar to putting your money in a high yield savings account. An example could be putting your crypto in to Maker Dao's platform where you earn a certain % of return per year on deposit.

Liquitidy mining ⛏ (WARNING: NERDY) - the process of liquidity mining is more advanced, but can be summed up by DeFi platforms offering rewards (normally their own platform-specific tokens) for trusting their application.